Money Coach

10:49 am

Tue April 8, 2014

Prepaid Debit Cards Not As Simple As They Seem

I'm Michel Martin, and this is TELL ME MORE from NPR News. Now it's time for our money coach conversation. That's the part of the program where we talk about the economy and personal finance.

Today, we want to talk about debit cards, specifically prepaid debit cards because more and more people are using them - some to avoid traditional banking institutions, some to have more control over their spending and to avoid debt. But not all of these cards are the same, especially when it comes to the fees they charge. We wanted to talk more about this so we've called, once again, our money coach Alvin Hall. Welcome back, Alvin.

ALVIN HALL: I'm glad to be back.

MARTIN: So tell me about the prepaid debit cards and why are they so popular now?

HALL: Prepaid debit cards are really popular among low-income people who don't have access to traditional banks. They want to use their money, but they don't want to pay all of these fees to go to one of the check-cashing places. They could lose their check. And this seems, on the surface of it, to be an easier way to manage your money.

MARTIN: But you're saying it's not.

HALL: It's not. This whole period here right now reflects very much something I saw in the 1980s. And the 1980s, a large number of people started to put money into mutual funds, and it's parallel to the growth that people are seeing in debit card use as well as prepaid debit card use. So it's growing by huge amounts.

MARTIN: So why are these items attractive to banks? I mean, presumably, they're already getting fees from the debit cards that are attached to their traditional checking accounts. So why are these prepaid debit cards attractive to the issuing institutions?

HALL: Because of the number of users that they expect to have by, let's say, 2016. And they're seeing so much growth. And remember, I have this motto that where there is money, there's always creativity. And so now they're splicing and slicing these fees to create more fees. There are fees for activating your cards.

There are fees for reloading your cards. There are fees for monthly maintenance, fees to get paper statement, fees to check your balance, fees for customer service. You go on and on. I looked at a broad range of cards, and I found 10 fees that you could be subject to. And it depends upon how they sliced and diced them and how they put them together that reflects your card. And there's no consistency across the board.

MARTIN: Is that really the key issue here - it's really hard for consumers to compare between different instruments? Let's say you want to open up a traditional checking account.

HALL: Yes.

MARTIN: You can go to Bank A and Bank B, and you can compare - or a credit union, and compare side-by-side - this is how much for checks, this is how much of it goes below a certain balance. Why is it harder to compare this with prepaid debit cards?

HALL: Because there is no uniform way of displaying the fee in a chart format that everyone can understand and quickly compare the rates. The Pew Charitable Trusts has proposed this sort of chart format, but it's voluntary not mandatory. It needs to be made mandatory just the way it was in the mutual fund industry in the '80s.

Michel, there's nothing really new about this. In the '80s, we had fee madness in the mutual fund industry. Now we have fee madness in the prepaid debit card industry. And the way they solved that in the mutual fund industry was to come up with a standard format where everything had to be laid out in a particular way so that the average investor could compare easily. They need to bring that same knowledge, that same wisdom and experience to the prepaid debit card market.

MARTIN: As I understand it, from the reporting in the Washington Post, the Post article says that prepaid cards are also attractive for banks because they're exempt from an amendment in Dodd-Frank. This is a bill that kind of overhauled a number of issues in the financial services industry that restricted the amount that banks could earn...

HALL: That's right.

MARTIN: ...From debit and credit card fees. So I guess one person's loophole is another person's opportunity.

HALL: Exactly.

MARTIN: Well, you're saying that there's no requirement that this information...

HALL: No.

MARTIN: ...Be kind of transparent and easy to understand.

HALL: That's what...

MARTIN: But I thought that there was a plain language requirement in this earlier law. It doesn't apply here?

HALL: Not nearly the same way. So in preparation for this, I decided to go out and get some prepaid debit cards. You can look at these things. Some of the important text is so small, I'd have to have a magnifying glass to read it.

How they present it is so different from one card to the next. There's no uniformity at all, and therein lies the problem. It is truly a buyer-beware market.

MARTIN: So what are some of the things that they charge fees for?

HALL: Let's see. Let us be creative here. First, we can imagine that they charge a monthly maintenance fee. That's reasonable. But what about for card replacements? They charge for that.

When you call up customer service because you have a problem, there is a charge for that. In some cases - although this is declining - when you use the card to buy something and they swipe it, there is also a fee associated with that. Some of them charge you if you use your debit card in the same network of ATM. Although, that is declining at the moment.

MARTIN: And I understand that there is some legislation being considered on this. I understand that Senator Mark Warner of - a Democrat...

HALL: Yes.

MARTIN: ...Of Virginia has proposed a bill that would require financial institutions to more clearly disclose prepaid card fees. But we understand that there was such a pitched battle over the Consumer Financial Protection Bureau to begin with, we can't predict. So in the absence of that, what does a consumer do?

HALL: I tell the consumer to go to places like Consumer Reports and other third- party agencies like this that evaluate these types of cards and rate them from best to worst. Do not expect the card that you have today to be the best card in six or eight months. So you're going to have to constantly look and check and make yourself aware because the creative people at these firms, they see cash flow.

MARTIN: So the brand of a particular institution that you may have had a pre-existing relationship with - and I'm not going to name...

HALL: Yes.

MARTIN: ...Any particular one - but just because you've had a good experience with a particular instrument six months ago, you're saying means nothing.

HALL: It means nothing because they may decide that the marketplace has changed, they've reached a certain critical mass of number of users. Therefore, they can take away this particular benefit that benefit those users because they figured these people probably won't go anyplace else. They are comfortable there, and they're less likely to move.

MARTIN: It there anybody else? Consumer Reports you're saying is one way to evaluate these kinds of instruments, which is a nonprofit.

HALL: Exactly.

MARTIN: Anybody else?

HALL: I would look at places like Bankrate.com. I'd even look at some of the business magazines that routinely rate these cards over a period of time. And there must be websites out there that I don't know about that also offer comparisons. The key thing is, constantly look. Don't assume that the card you have today will be as good in six months or a year from now.

MARTIN: Alvin Hall is an author and personal finance educator. He joined us from our studios in New York City. Alvin Hall, thank you so much for joining us.

HALL: Glad to be here about this important topic to so many people. Transcript provided by NPR, Copyright NPR.